Shunned sector attracts Carnegie

He has promised to shake up the ailing local venture capital market – and former investment banker
Mark Carnegie
looks set to do just that.

Using his private $125 million Apostle Carnegie Private Opportunities Fund No. 1, Mr Carnegie is underwriting half of an $18.6 million capital raising by an oil and gas exploration and production company,
Strike Energy
, which is listed on the Australian Securities Exchange.

Strike Energy has a joint venture in the area of Texas, Eagle Ford Shale, that is attracting big investors. On July 15, BHP Billiton agreed to buy a company operating in the same area, Petrohawk Energy Corporation, for $US12.1 billion.

Mr Carnegie formed the Carnegie Wiley investment bank with John Wiley in 1999. Three years ago it was sold to US investment bank Lazard.

Most Australian venture capital managers prefer information technology and life sciences companies. Few have invested in resources. This is partly because federal government programs such as the Innovation Investment Fund reward them for investing in tech. (Mr Carnegie also manages a $40 million IIF, but did not use any of that fund to invest in Strike.)

It is also a preference of most managers, who regard the mining and resources sector as speculative, already attracting enough investment and lacking innovation and intellectual property.

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Venture capital, which once “included anything", ended up with the dotcom bubble “defining itself as technology", he said.

“Then, that was all it was: ‘We are going to bring Silicon Valley to Australia’!"

However, Mr Carnegie believes the resources sector is innovative.

In June Strike Energy signed a deal with four Texas petroleum companies giving it access to a new extraction technique that is already in use for coal seam gas and can be applied to oil reserves.

One of the company’s partners will operate the Texas project in the Eagle Ford Shale region.

Through the venture, Strike Energy will learn the new technique, which involves drilling horizontally and then “fracking", or fracturing the rock, to drain oil into the hole. Production can be three to five times faster than vertical drilling.

Strike can then apply the new technique to its local petroleum exploration permits, in particular 324,000 hectares in South Australia’s Southern Cooper Basin.

Venture capital is usually the domain of private companies, not listed ones. After helping to fast-track the private company’s growth, venture capital managers sell their shareholding in a public listing.

But Mr Carnegie insisted the investment was venture capital.

“If Strike can modify the technology to frack shale and produce oil, not gas, that is the key bet here," he said.

The other half of the capital raising is underwritten by the lead manager of the share sale, Perth-based investment advisers Blackswan Equities.